Why Mortgage Protection Insurance Is Often a Bad Deal

Don't buy mortgage protection insurance until you read this.

Mortgage protection insurance is a specific kind of life insurance. It's different from private mortgage insurance (PMI). PMI is insurance that borrowers must buy if their down payment is below 20%. PMI protects lenders from losses in case of foreclosure. Unlike PMI, which is usually required on small down payment loans, mortgage protection insurance is totally optional.

Anyone who is thinking about buying mortgage protection insurance should understand how it works. There are some big downsides to this kind of life insurance, and it is usually not the best type of policy to buy.

How does mortgage protection insurance work?

Mortgage protection insurance is in effect while the policyholder has an outstanding mortgage loan. The homeowner with the loan pays premiums for the mortgage protection insurance. If the homeowner dies while there is still money due on the mortgage, the insurance pays off the remaining loan balance.

In some cases, mortgage protection insurance will also make payments toward a home loan in the event the policyholder becomes disabled while payments are still due. Only the principal and interest are paid with most policies, not any other costs included in a monthly mortgage payment, such as property taxes or home insurance costs.

Why is mortgage protection insurance a bad deal?

It may seem tempting to buy mortgage protection insurance in order to ensure surviving family members can remain in a shared home in case of an untimely death.

However, mortgage protection insurance is not usually the best type of protection to put in place for a few key reasons:

• The coverage can be much more expensive than a standard term life insurance. Premiums for mortgage protection insurance are usually high. By contrast, it may be possible to buy a standard term life policy for less. The standard term life policy would offer a death benefit that could be used to pay off any remaining mortgage balance.
• The value of the coverage diminishes over time. When a homeowner has a loan, they make payments on it monthly. As these payments are made, the balance declines. As a result, the value of the mortgage protection insurance policy also declines every single month as the mortgage balance falls.
• Mortgage protection insurance offers limited protection. Mortgage protection insurance only repays a home loan. There may be other costs that surviving loved ones need help with after an untimely death. For example, it may be important for life insurance to provide enough money to pay for a child's education if a parent passes. A standard term life policy offers a choice of how large the death benefit should be, enabling a policyholder to ensure surviving loved ones receive more than just a paid off house after a death occurs.

For all of these reasons, anyone who is considering buying mortgage protection insurance should get some life insurance quotes for a term life policy. Most consumers will find they can get life insurance that offers more money than is necessary to repay their loan -- and for a more affordable cost than they'd pay for mortgage protection insurance.